Prime Restaurants Royalty Income Fund
TSX : EAT.UN

Prime Restaurants Royalty Income Fund

February 26, 2010 08:41 ET

Prime Restaurants Royalty Income Fund Signs Definitive Agreement to Combine with Prime Restaurants of Canada Inc. and Convert to a Corporation

MISSISSAUGA, ONTARIO--(Marketwire - Feb. 26, 2010) - Prime Restaurants Royalty Income Fund (TSX:EAT.UN) (the "Fund") announced today that the Fund has signed a definitive agreement (the "Combination Agreement") with Prime Restaurants of Canada Inc. ("PRC"), PRC's sole shareholder, Prime Restaurant Holdings Inc. ("PRH") and PRC Trademarks Inc. ("TradeMarkCo") regarding the terms of a previously announced transaction (the "Combination Transaction") to combine and form a new, publicly-traded corporation to be named Prime Restaurants Inc. ("Amalco").

"The trustees unanimously recommend this transaction to the Fund's unitholders," said Steven Sharpe, Chairman of the board of trustees of the Fund. "The combination of PRC, TradeMarkCo and the Fund will simplify the structure of the combined business. In addition, the trustees believe that the interests of all parties are best served by a corporate structure that provides greater transparency, oversight of the operating business and access to financing. The proposed combination will result in a corporate structure that provides enhanced accountability to investors, and a more direct correlation between the performance of the operating business and the results and prospects of the public corporation. Under the proposed new structure, the current 'vend-in' formula for new restaurant additions to the royalty pool will be eliminated and the benefits of any growth in the Prime Restaurant system will accrue to all investors. In conjunction with the previously announced operational restructuring well under way at Prime, we believe the future is positive for the combined businesses."

Under the existing structure, TradeMarkCo receives licensing royalties generated by the restaurants franchised or owned by PRC (the "Prime Restaurants"). The Combination Transaction will consolidate ownership of the intellectual property for the Prime Restaurants (which is currently owned by TradeMarkCo) and the franchising business currently operated by PRC. The conversion to a corporation in conjunction with the Combination Transaction will also provide certainty to the unitholders of the Fund ("Unitholders") with respect to the 2011 effective date of tax legislation affecting income trusts and will simplify the structure of the combined business.

Principal Terms of the Combination Transaction

The new entity, Amalco, will be the result of the combination of PRC and TradeMarkCo. The Fund will be dissolved as part of the transaction and Unitholders will receive shares in Amalco.

As previously announced, Amalco will have three classes of shares. Unitholders will receive, for each unit of the Fund, one Class A Limited Voting share of Amalco. For more information on the classes of shares of Amalco and PRH's interest in Amalco immediately after the completion of the Combination Transaction, refer to the Fund's press release dated February 16, 2010 announcing the agreement in principle and the Fund's information circular (the "Information Circular") being prepared in connection with the Meeting (as defined below).

The Combination Transaction will submitted for approval by the Fund's Unitholders at the Fund's annual and special meeting of Unitholders (the "Meeting"), currently scheduled to be held at Bier Markt restaurant, 58 The Esplanade, Toronto, Ontario at 10:00 a.m. (Toronto time) on March 30, 2010. The record date for determining Unitholders eligible to vote at the Meeting is February 26, 2010. The Fund's Information Circular will include a summary of the Combination Agreement and additional details concerning the Combination Transaction. Unitholders should review the full text of the Combination Agreement, which will be filed on SEDAR (www.SEDAR.com) for all terms and conditions of the Combination Transaction. The Information Circular is expected to be available on SEDAR on March 5, 2010 and the Fund expects to mail the Information Circular to Unitholders in early March 2010.

Valuation and Fairness Opinion, Board Approval and Recommendation

The trustees of the Fund engaged Capital Canada Limited to prepare a formal valuation of PRC and the Fund as well as a fairness opinion on the Combination Transaction (the "Valuation and Fairness Opinion"). The Valuation and Fairness Opinion states that, in the opinion of Capital Canada, as of February 25, 2010, the fair market value range for the Fund is in the approximate range of $36.7 million to $42.7 million, the fair market value range for PRC is in the approximate range of $12.4 million to $18.1 million and that the Combination Transaction is fair, from a financial point of view, to the disinterested Unitholders. A copy of the valuation and fairness opinion will be included as an appendix to the Fund's Information Circular.

The Trustees, based upon their own investigations and deliberations, including their consideration of the Valuation and Fairness Opinion, have unanimously concluded that the Combination Transaction is fair to disinterested Unitholders and is in the best interests of the Fund and its disinterested Unitholders, and recommend that disinterested Unitholders vote in favour of the Combination Transaction.

Approvals and Closing of the Transaction

The Combination Transaction will be effected by way of plan of arrangement under the Business Corporations Act (Ontario). The Combination Transaction requires (i) approval by the holders of at least 66 2/3% of the votes cast by Unitholders present in person or by proxy at the Meeting, and (ii) "majority of the minority" approval, excluding the votes of PRC, together with any parties related to, and any person acting jointly or in concert with, PRC, including John Rothschild. The completion of the Combination Transaction is also subject to approval by the Ontario Superior Court of Justice, approval of the TSX for the substitutional listing of the Class A Limited Voting shares to be issued pursuant to the Combination Transaction and receipt of any necessary third party consents. There can be no certainty, nor can the Fund provide any assurance, that these conditions will be satisfied or, if satisfied, when they will be satisfied. If these conditions are satisfied as anticipated, the Combination Transaction is scheduled to close on or about April 5, 2010.

Distributions

In anticipation of the Combination Transaction, the Fund also announced today that monthly distributions to Unitholders are expected to remain at $0.04 per Unit effective until the distribution payable in March 2010 to Unitholders of record on February 28, 2010. The distribution that would typically be paid in April to Unitholders of record on March 31, 2010 will instead be paid as a dividend by Amalco on or about April 15, 2010 to holders of Class A Limited Voting Shares of Amalco of record on April 8, 2010.

If the Arrangement receives all necessary approvals and is implemented, it is anticipated that Amalco will adopt a dividend policy to pay dividends on a quarterly basis on the Class A Limited Voting Shares. It is currently anticipated that the amount of such quarterly dividend will initially be $0.12 per Class A Limited Voting Share. The dividend policy will be subject to the discretion of the board of directors of Amalco and may vary depending on, among other things, Amalco's operating cash flow, financial requirements, restrictions under future credit facilities, the satisfaction of solvency tests imposed by the corporate legislation for the declaration of dividends and other conditions existing at such future time. As a result, no assurance can be given as to whether Amalco will pay dividends, or the frequency or amount of any such dividend.

Advisors

As previous stated, the trustees of the Fund engaged Capital Canada Limited to prepare a formal valuation of PRC and the Fund as well as a fairness opinion on the Combination Transaction. TD Securities Inc. is acting as financial advisor to the Special Committee of the board of directors of TradeMarkCo. National Bank Financial Inc. is acting as financial advisor to PRC. Goodmans LLP is the legal advisor to the Fund and the legal advisor to PRH and PRC is Stikeman Elliott LLP.

About Prime Restaurants Royalty Income Fund

The Fund, through TradeMarkCo, is entitled to receive top-line royalties of 3.25% of the gross food and beverage revenue from pooled restaurants under the terms of a 99-year licence agreement between TradeMarkCo and PRC.

About PRC and the Fund

PRC operates and franchises a diversified portfolio of leading brands of casual dining restaurants and premium pubs in Canada. As a pioneer in the Canadian casual dining industry since 1980, it is considered an important innovator in the development of strong brands, and today has three core brands: East Side Mario's, Casey's and Fionn MacCool's. PRC and its franchisees employ approximately 12,000 people across the country.

The Fund is a limited purpose trust authorised to issue an unlimited number of Trust Units and established to invest in TradeMarkCo. The source of revenue for the Fund is through its ownership in, and debt instrument issued by, TradeMarkCo. The Fund receives interest income on the TradeMarkCo Note which it distributes to its Unitholders. TradeMarkCo owns certain trade-marks and licenses their use to PRC which operates and franchises the restaurant and bar business. In return, TradeMarkCo receives royalty income from the royalty pooled restaurants operated and franchised by PRC. Additional information relating to the Fund, including the Fund's financial statements, the Annual Information Form of the Fund and PRC's MD&A and consolidated financial statements can be found at www.sedar.com and the Fund's website at www.primeincomefund.ca

Forward-Looking Statements

The public communications of the Fund often include written or oral forward-looking statements. Statements of this type are included in this news release, and may be included in filings with Canadian securities regulators, or in other communications. Forward-looking statements may involve, but are not limited to, comments with respect to our objectives for 2010 and beyond, our, PRC's and Amalco's strategies or planned future actions, our, PRC's and Amalco's targets or expectations for our financial performance and condition, PRC's ability to pay royalty payments and our ability to pay distributions or dividends. All statements, other than statements of historical fact, contained in this new release are forward-looking statements, including, without limitation, statements regarding the future financial position and operations (including estimated revenue from royalty pooled restaurants and the estimated administrative and other operating expenses of the Fund), business strategy, distributions, plans and objectives of or involving the Fund, PRC and Amalco. Readers can identify many of these statements by looking for words such as "believe", "expects", "will", "intends", "projects", "anticipates", "estimates", "continues" and similar words or the negative thereof. Although management of the Fund and PRC believe that the expectations represented in such forward-looking statements are reasonable, there can be no assurance that such expectations will prove to be correct.

By their nature, forward-looking statements require us to make assumptions and are subject to inherent risks and uncertainties including those discussed in the Fund's MD&A and the Fund's annual information form dated March 11, 2009, (the "AIF") under "Narrative Description of the Business – Risk Factors" which are available at www.sedar.com. There is significant risk that predictions and other forward-looking statements will not prove to be accurate. We caution readers of this news release not to place undue reliance on our forward-looking statements because a number of factors could cause actual future results, conditions, actions or events to differ materially from the targets, expectations, estimates or intentions expressed in the forward-looking statements.

Assumptions and analysis about the performance of the Fund, PRC and Amalco and the markets in which they operate are considered in forecasting the Fund's, PRC's and Amalco's expected financial results, PRC's ability to pay royalty payments and the Fund's ability to pay distributions and in making related forward-looking statements. The key assumption in respect of the Fund's level of distributions is that the cumulative distributable cash will be able to support the Fund's current level of distributions. The Fund receives the cash it distributes from TradeMarkCo. TradeMarkCo receives all of the cash it pays to the Fund through a royalty from PRC. Accordingly, the ability of the Fund to pay its distributions depends on PRC's financial performance and ability to pay the royalty. In respect of the ability to maintain and grow the royalty pooled revenue and PRC's financial performance, key assumptions include those relating to the demand for the goods and services under the Prime trademarks and in respect of the Canadian markets in which the royalty pooled restaurants operate. Should any of these factors or assumptions vary, actual results may differ materially from the forward-looking statements.

The information set forth in the MD&A and AIF identifies factors that could affect the operating results and performance of the Fund and PRC. We caution that the list of factors discussed in the MD&A and the AIF is not exhaustive, and that, when relying on forward-looking statements to make decisions with respect to the Fund, investors and others should carefully consider the factors discussed, as well as other uncertainties and potential events, and the inherent risks and uncertainties of forward-looking statements.

The forward-looking statements contained herein are expressly qualified in their entirety by this cautionary statement. The forward-looking statements included in this news release are made as of the date of this news release. Except as required by applicable securities laws, the Fund does not undertake to update any forward-looking statement, whether written or oral, that it may make or that may be made, from time to time, on its behalf.

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